What should you be doing NOW?

Amar Pandit , CFA , CFP

I received a lot of love for my last Tuesday’s post “Uncomfortable Conversations with your Elderly Parents”. This week, I had planned on writing a post to build on this previous one covering the subject of organizing your Parents Documents, Finances and Estate Plan. However, I had to delay this a bit as the noise in the markets is getting louder and louder. There are many scaremongers shouting on top of their voice that the markets are too heated. Many have been ranting this for quite some time in a mindless way.  There are also others who are ready to rush in with stupid theories of protecting your downside while giving you the upside. I thought it was important to shed some light on the noise and the things you could possibly do.

First, I have never understood that when markets are down, many people scream doom and scare others to run when they actually should be investing. Now when the markets are up, the same people and additional ones join the band wagon and scream “Why are the markets going up so fast? This is not right. That is not right.” I ask a simple question “What do you really want to happen? Should the market be going up and down the way you feel?” In Hindi “Chaahte Kya Ho?

Second, I had ended my December 15th Post “Where is the Market Headed?” with a Nick Murray quote “Permanent Loss in a broadly diversified portfolio of quality equities held for the long term is a MYTH. That in fact when permanent loss occurs, it is always a human achievement, of which the equity market itself remains incapable”. Read this quote and the post again.

Third, I am not claiming that the markets will go up from here and that they cannot correct. In fact, market corrections are normal, healthy and they happen all the time. In your investing lifetime of 30-50 years, you could witness at least 30-50 corrections of 10-15%, 10-12 corrections of 30% and roughly 4-7 corrections of 50% plus. Now do not get fixated on these numbers. I have given these approximately to give you a perspective that corrections are normal, and they will happen. You need to understand that Investing in Equity is not Investing in a High Return Fixed Deposit. It is because of the volatility of the markets that you have the opportunity to get a higher return than a fixed deposit or fixed income investment. I have written many interesting things in my December 1st and December 15th posts, so I will not repeat them again. You can read them again as they are critical and key concepts for any investor to understand. I will now give some numbers and ask you to think wisely (not feel but think).

Let us say you exited on December 1st, 2020 at Sensex Level 44655. Great. You paid Capital Gain Taxes (Long Term or Short Term) and now you are waiting for the markets to come down. The Sensex today as I write is at 49126. The index is up 10%.  Was this a great decision? No. Now what if the index had gone down to 40000. Would it have been a great decision? I would still say “NO”.

I know you are surprised and might say “Amar, I can now enter again at 10% lower”. Just because you can enter lower does not mean you will enter lower. When the markets are correcting, it is difficult to invest when we are thinking emotionally. If the Sensex goes to 40000, many will wait for it to go to 35000 and the cycle will continue. To this, you might say “I am wise, and I don’t think emotionally”. Well, you are thinking emotionally NOW because you are concerned about the noises and either want to exit or not invest new money. You are not thinking about “What is happening with my plan? What is happening in my Life? Am I introducing market timing risk into my portfolio? Am I increasing the risk or reducing the risk to get lower returns?” The risk to any long-term investor does not lie in not beating markets or benchmarks but the risk lies in not achieving one’s financial goals (even if that objective is as simple as protecting the value of your money and ensuring that you can maintain or better your lifestyle even in retirement).

The key question to ask is “What is the point of all this?” If corrections are normal and an integral part of equity investing, what good does jumping in and out of the market do for me? Not much I can confidently say other than increasing your taxes, costs (majorly market timing costs), anxiety and stress levels. In fact, some people abandon their plan and start behaving like a trader which for almost everyone is a recipe for creating a permanent loss in the portfolio.

Here are a few things that you could do today:

  1. Ask yourself “Do I need the money in the next 6 or 12 months?” If that is the case, then you should certainly book out and get into cash even if the markets were going up.
  2. If you do not need the money, then look at your Asset Allocation and see whether are you comfortable with it. If not, you can rebalance which means sell equity and move into debt/cash or gold.
  3. If you do not need the money now (and are a long-term investor) and are comfortable with the equity allocation, then stay put. There is no need to time the markets and introduce market timing risk into the portfolio.
  4. If you have fresh money to invest, you can invest 50% of it today and 50% on dips through a Systematic Transfer Plan (unemotionally) in a short period of time.

Finally, I repeat one of my favourite lines “You are only Investing Now; You are not Investing FOR NOW. You would do well to remember this Warren Buffet gem Forecasts may tell you a great deal about the forecaster; they tell you nothing about the Future“. We must do what we must do. Invest like an Investor and Behave like an Investor. The day we start behaving like traders is when we set up our long-term plan and planning process for failure.

P.S. In the December 15th Post “Where is the Market Headed, I had given some insights and a perspective for you. Do reread this. Also, read the December 1st Post. Additionally, stay away from scaremongers and financial pornography.”

Disclaimer: The above is not investment advice. These are purely personal thoughts on what I would do as a professional for myself and my rationale behind it. Kindly consult your financial professional for guidance on your personal matters.